The Apple Ecosystem

No company is an island; even the most integrated manufacturer or service provider relies upon a cooperative ecosystem of other companies. In the case of Apple (Nasdaq:AAPL) and its multi-billion dollar successes, the iPhone and the iPad, there is a long list of companies that are involved in the process. Consider the fact that Apple logged over $16 billion in costs of goods sold for the December quarter - an amount that on an annualized basis is larger than the GDP of Ecuador. (We look at a retailer's inventory turnaround times, its receivables as well as its collection period. See Measuring Company Efficiency.)

That is a large amount of money by any measure, and a sign of the value of being tapped as a supplier to Apple. As Apple shows no sign of slowing down anytime soon, it is worth examining who else directly benefits from Apple's successes. Here is a quick rundown of the Apple ecosystem.

Readers should note, though, that Apple's ecosystem is not static - the company sources certain components from multiple suppliers and will occasionally replace suppliers when price and performance dictate a change. Once such change has taken place relatively recently, as Linear Technology (Nasdaq:LLTC) no longer supplies the DC/DC converter or USB controller for the iPad2.

iPhoneWhile the iPod put Apple back on the map as a viable consumer tech company, the iPhone vaulted the company to a never before seen level of success. Keep in mind, too, that while the iPhone may have the lead in U.S. smartphone sales, Apple has a long way to go to become the number one cellphone company in the United States, let alone taking on Nokia (NYSE:NOK) for global dominance. Consequently, there is likely still much more to come for the suppliers involved in this product.

Apple's own A4 processor is the heart of both the iPhone and iPad. Although the chip has the Apple logo stamped on it, Samsung (OTCBB:SSNLF) does the actual manufacturing of the chip and the architecture comes fromARM Holdings (Nasdaq:ARMH). Samsung is also the flash memory provider, though some reports suggest that Apple uses multiple vendors.

The front end GSM module comes from Skyworks (Nasdaq:SWKS), while Broadcom (Nasdaq:BRCM) is also heavily involved in the iPhone's wireless chips. Texas Instruments (NYSE:TXN) supplies the touchscreen controllers, while OmniVision (Nasdaq:OVTI) makes the camera work and STMicroelectronics (NYSE:STM) provides the accelerometer.

Of course, that is only one end of the ecosystem. Apple tapped Foxconn for the assembly of the device, while distribution takes place through wireless providers like Verizon and AT&T, as well as retailers like Best Buy. (Evaluate the past performance before investing in these types of gadget funds. Check out Technology Sector Funds.)

iPadThe iPhone is far from old news, but Apple's iPad is the next step forward in Apple's shakeup of traditional consumer electronics. As with the iPhone, the iPad is complicated collection of components supplied by a number of vendors. Perhaps not too surprisingly, Apple has tapped many of the same companies for key components of the iPhone and the iPad.

As mentioned, Apple uses the A4 chip in both the iPhone and iPad. Likewise, Samsung is a major flash memory supplier (complemented by at least Toshiba and perhaps others as well), and STMicroelectronics likewise supplies the accelerometer. Broadcom supplies a lot of the device's wireless chip needs, but also compliments Texas Instruments with microcontrollers for the touchscreen.

LG Philips handles the display for the iPad, while Intersil (Nasdaq:ISIL) and Atmel (Nasdaq:ATML) supply other components as well. As with the iPhone, Foxconn assembles the device while retailers like Best Buy handle at least some of the retail distribution.

Important, But Only to a PointIs it good to be involved in Apple's supply chain? On balance, the answer would seem to be "yes." That said, simply being included in Apple's products is not an automatic make-or-break for many of these suppliers. In the case of Linear, for example, the chip company decided that it was more important to preserve its margins than Apple's revenue and the impact to the company seems to be measured in pennies per share. Likewise, it is hard to say that Texas Instruments or Samsung is desperately reliant upon Apple to make a go of it.

Consequently, while it is good to monitor those companies that are leveraged to the next "new thing", careful due diligence demands figuring out just how much leverage there really is. In many cases, particularly for the largest chip companies, involvement in a hot new product is really just a part of replacing declining legacy business and not a dramatic driver of results. (Return on research capital (RORC), can help investors measure how much profit R&D spending actually generates. See R&D Spending And Profitability: What's The Link?)